–See Mostly Downside Risks To U.S. Economy

By Brai Odion-Esene

WASHINGTON (MNI) – The U.S. economy is on a moderate but solid
growth path, yet it remains fragile and any severe shock could derail
the recovery, said a group of U.S. bank economists Wednesday.

During a press conference to present its economic forecast and
monetary policy predictions, the American Bankers Association’s Economic
Advisory Committee also predicted that the private sector will add over
2 million new jobs this year.

“The economy is moving ahead in a lengthy rehab process and will
eventually return to full health and strength. This involves
transitioning from monetary and fiscal stimulus to a self sustaining
recovery in the private sector,” said Stuart Hoffman, committee chairman
and chief economist of PNC Financial Services Group Inc.

However, in response to a question from Market News International,
Hoffman added, “We are very conscious of the fact that the economy’s
growth is fragile enough that if there were a series of major shocks, it
could throw the economy back into recession.”

But the committee anticipates moderate, sustained economic growth,
he said. It predicts real GDP to grow at a 3.2% annual pace in 2010.
Next year its expects the economy to expand by 3.0%.

“There are always shocks that could occur,” Hoffman said. The
situation in Europe is not a big enough shock to disrupt global and U.S.
economic expansion “although it will probably reduce it by a modest
amount.”

The committee’s consensus is that the balance of risks “is still to
the downside,” Hoffman said, particularly with regards to inflation.

“Those that had low inflation expectations thought the movement of
the Fed funds rate would be slower and start later,” Hoffman said.
“Those with relatively higher inflation expectations forecast that the
Fed will move interests up more vigorously.”

The committee consensus is that consumer price inflation will slow
to nearly 1.0% percent this year and rise to just 1.8% in 2011.
According to Hoffman, “inflation expectations will remain subdued and
well anchored.”

The group unanimously expects the Federal Reserve to start raising
interest rates at some point in 2011. The consensus is that the federal
funds rate will rise to a median estimate of 1.0% by this time next year
and 1.5% by the end of 2011.

The committee does believe that a double-dip recession in the U.S.
is very unlikely, and foresees the private sector adding a total of 2.2
million new jobs in 2010 and another 2.5 million new jobs in 2011.

“The bad news is that many people are still unemployed so 3.0%
growth will not be enough to take a big bite out of the unemployment
rate, despite persistent job gains,” said Hoffman.

The U.S. bank economists expect the national unemployment rate to
drop steadily, but slowly, from 9.7% in May to 8.5% at the end of next
year.

One consistent cause of concern for the group is housing, with many
economists present telling MNI following the press conference that there
remains the risk of a double dip in housing next year.

Data from the Commerce Department Wednesday showed the pace of
housing starts fell 10.0% in May to a 593,000 seasonally adjusted annual
rate, well below expectations and following downward revisions to the
gains in March and April.

Building permits fell 5.9% to a 574,000 annual rate in May, while
homes permitted but not started fell 4.0%, an indication that builders
remain cautious despite signs that the pace of sales has improved
drastically from a year ago.

There is concern among committee members that the fall-off in
housing “could be more severe,” Hoffman said.

The ABA group believes a shift by the Fed toward a less
accommodative monetary policy will push other interest rates modestly
higher. The three-month Treasury bill yield is expected to rise from
0.08% at present to a median estimate of 1.0% in December 2010 and 1.8%
in December 2011.

The 10-year Treasury and 30-year fixed-rate mortgage rates are
expected to rise by just over one percentage point by the end of 2011,
to 4.4% and 6.15%, respectively.

As stated by Hoffman earlier, the bank economists see limited
adverse impact on the American economy from turmoil in European
sovereign debt, believing the backstop provided by European leaders will
help restore market confidence and contain financial market instability.

The negative impact of economic weakness in Europe on U.S. activity
will be mostly offset by lower Treasury and fixed mortgage interest
rates, and commodity prices — although one economist told MNI that he
sees commodity prices jumping higher as emerging economies continue
their strong rebound from the global recession.

“The most notable effect on the U.S. will be lower U.S. exports
globally due to a weakening European economy and a strengthening
dollar,” Hoffman said.

The Committee also projects delinquencies on business and consumer
loans to decline over the next couple of years “slowly.” They add that
the growth of bank credit to both consumers and businesses will pick up
in 2010 and grow even more rapidly next year.

The federal budget deficit, they predict, will end the year at $1.4
trillion and then fall to $1.1 trillion in 2011.

** Market News International Washington Bureau: 202-371-2121 **

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